It should be obvious by now who the investor’s worst enemy is. It is the investor himself/herself.
Why is the investor’s worst enemy themselves? Because we fall prey to emotion.
Emotion is a good thing in life. Image how bad the world would be if we had no emotion. However, emotionalism in investing often turns harmful.
We are prey to FOMO. Fear of missing out leads us to extremes. We buy after the craze is long underway, and lose. We sell when prices are low.
We feel we must need to “stay in the loop” of information, but take things too personally and we make emotional judgments about ourselves. We compare and measure ourselves against others.
Making a plan and sticking to it seems so logical and obvious when we start on our journey, but later we allow ourselves to be swept up in emotional reactions to events, and abandon the plan.
And these episodes of ditching one’s plans and succumbing to the most recent craze is not limited to GameStop or Tesla. While it goes back centuries, it has also occurred numerous time within our living memory. We tend to discount the ones from our past, and think we are immune. But we are not.
Here are only some of the manias in the last few centuries. Not all are stock market manias, but all swept up millions.
Game Stop stock Cryptocurrencies (this one has not fully played out yet) Internet (dot-com) stocks (1990s) Nifty Fifty stocks (1960-70s) The Roaring Twenties Beanie Babies Cabbage Patch Kids Tickle Me Elmo Furbys Coonskin caps Railroad Mania (1840s) in the U.K. Canal Mania (1790s-1810s) in the U.K. South Sea Bubble (U.K.) Tulip bulb mania and countless others.
We think we can ride the wave and get out before the end. But if we wait until the last minute, we have waited too long.
If we do not wait for the last minute, we have the opportunity to retain our successes. ”Repeatedly in my market operations I have sold a stock while it still was rising – and that has been one reason why I have held onto my fortune.”–Bernard Baruch
We think we are too smart, too alert, too aware to be taken in. But we are. This quote sums it up: “The more intense the craze, the higher the type of intellect that succumbs to it.” (Author unknown) Attributed to a speech give in 1929 to the Chamber of Comerce of New York analyzing the 1929 crash, quoted by Benjamin Anderson in his 1949 book Economics and the Public Welfare.)
Making a plan and sticking to it seems so logical and obvious. We should allow ourselves no alternative.
“Gifts of the Ebb Tide (Shell Book)” is a Japanese woodblock print from 1789 by Utamaro Kitagawa. Original title is Shiohi no tsuto. Courtesy New York Public Library.
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